Will Craft Consolidate?

Beer Business Daily:

People have been predicting the rollup of the craft brewing industry for — well, as long as I’ve been in the industry. There have been some thrusts and feints. When Miller acquired Leine’s and Celis and A-B took a stake in Redhook in the early days, it was thought that this was just the beginning of a big gobble-up by the Bigs. But then craft slowed down and consolidation virtually stopped. Or almost stopped. In the late 1990s there was a flurry of expectation when flamboyant billionaire from India, Vijay Mallya, announced he was going to rollout the U.S. craft industry and took a majority stake in Mendocino Brewing Co. as a start. But no rollup ever materialized. Then Basso Capital bought Magic Hat and Pyramid, and we know how that turned out.

Today, with craft so hot and private equity circling above, that rollup talk is starting again. Craft brewers are getting inundated by calls from bankers. SweetWater Brewing chief Freddy Bensch got a handwritten note with a crisp $50 bill from a banker asking for a meeting, according to a piece in Bloomberg. He took it to the pub and bought a round, but didn’t take the meeting.

How long can that go on? “A scarcity of sellers amid demand by private equity and major brewers could force open the tap within the next two years, dealmakers and brewers agree,” says Bloomberg. But for the moment, times are so good that nobody is feeling any pain to sell. Townsend Ziebold at First Beverage Group points out that “none of them are really feeling any operation headwinds at the moment.” They’re “going to be smart enough and forward-looking enough to recognize some of the issues that are ultimately going to make competing in the industry more difficult. They’re going to want to take money off the table,” added Townsend.

But those headwinds aren’t here, at least not yet. Lots of buzz has resurfaced lately of the Bad Ol’ days of the late 1990s when the perfect storm of excess capacity, old beer, and pricing pressure hurt the industry. If that pain returns, I expect there will be some deals.

But it’s not a given. As Jim Koch of Boston Beer pointed out to me recently, there are negative synergies in buying breweries, not the least of which is that no two breweries have distribution footprints which match up exactly, so you’re likely going to be competing against yourself in many markets when you buy brewery.

And for now, there just aren’t that many sellers ….. yet. Larry Bell from Bell’s Brewery says an exec from a mega-brewer slipped a business card into his pocket at our Beer Summit in San Diego last year saying only, “You’re selling. I’m buying.”

Larry’s not a seller though, telling Bloomberg: “It takes so long to build equity in the brewery, once you’ve got it — especially if your name is on it,” he said. “Do you really want to sell that to some private-equity people that are just there to make a bunch of money and flip it? What does that do for your legacy? That’s not why I spent 30 years building the business.” However, Larry says the first craft brewer to sell out “is probably going to get the most dollars per barrel. If you are on the fence and you think you want to get your money, that may be the time while the getting’s good.”

Another brewer not for sale is Stone’s Greg Koch, who said, “There’s no case to be made” for them selling out. Besides, if he needs money for expansion there are many banks lined up to lend him the money.